Overview:

• The Q3 CPI came in a little below expectations, with core rates of inflation of 0.3/0.4% q/q and a headline rate of 0.6% q/q. Economists had expected around 0.4/0.5% and 0.8% q/q rates respectively. These outcomes left y/y inflation rates around the 1.8-1.9% mark for the various headline and core inflation measures, which was a little below the lower edge of the RBA’s 2-3% inflation target.
• In this Weekly we delve into what is driving the subdued inflation outcomes in Australia. As RBA Deputy Governor Guy Debelle reminded us, “it is very important to understand the starting point for the forecast – as well as how one arrived at the starting point – to successfully forecast the future”!
• We investigate trends within the 87 items of the CPI basket. We find that around 40% of the CPI basket has been falling in price over the past year. This mainly reflects falling prices for food, globally traded manufactured goods such as clothing and furniture, and the long-term price decline in technology products.
• This leads us to conclude in a general sense that it will be relatively hard for Australian inflation to pick up too much in coming years, barring: (i) an acceleration in the global component of inflation; or (ii) a tightening in the Australian labour market, which sees a decline in unemployment and underemployment lead to some pick-up in wages growth.
• What does it all mean for the RBA? In the near term, the low Q3 CPI likely rules out a move to increase interest rates early in 2018, not that NAB expected such a move in any case. This does not necessarily mean that the Bank will not adjust monetary policy next year. It however will mean that indicators of labour market spare capacity and wages trends will tend to be more important drivers of monetary policy decisions over the next 6-18 months than CPI outcomes. NAB continues to expect that the RBA will begin to reduce some of the support it is providing to the Australian economy in the form of low interest rates next year and is forecasting a half a percent increase in rates in the second half of 2018.
• For the week ahead, Friday’s September Retail Trade Report is the one to watch, NAB’s own Cashless Retail Index pointing to a strong 0.5% bounce-back. Other Australian data out this week includes Credit Statistics on Tuesday, followed by Building Approvals and Trade Balance on Thursday.
• Offshore it’s a busy week with the Bank of England expected to hikes rates on Thursday (markets are 80% priced). The US has its key PCE deflators Monday, ISM Manufacturing and FOMC on Wednesday, then Payrolls on Friday. China’s manufacturing PMI also gets released on Tuesday. The market is also expecting an announcement from President Trump this week on who the next Fed Chair will be.

For full analysis, download the report:

• Australian Markets Weekly: 30 October  2017 (PDF, 716kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets